ATO Interpretative Decision

ATO ID 2006/235

Income Tax

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Issue

Is the capital expenditure incurred by the taxpayer on a landscaping design 'construction expenditure' as defined in section 43-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The capital expenditure incurred by the taxpayer on a landscaping design is not 'construction expenditure' as defined in section 43-70 of the ITAA 1997 because the expenditure forms part of the expenditure on landscaping which is specifically excluded from 'construction expenditure'.

Facts

A severe storm damaged the garden of the taxpayer's rental property. The taxpayer incurred capital expenditure in engaging the services of a landscaping architect to re-design the rental property's garden. The landscaping architect provided the taxpayer with a landscaping design. The taxpayer subsequently carried out the landscaping works according to the landscaping design. Some of the landscaping works carried out were capital works to which Division 43 of the ITAA 1997 applied as they constituted more than earthworks that merely created artificial landscapes.

Reasons for Decision

A deduction under Division 43 of the ITAA 1997 for capital works is dependent, among other things, on whether there is construction expenditure for the capital works.

Construction expenditure is defined in subsection 43-70(1) of the ITAA 1997 as 'capital expenditure incurred in respect of the construction of capital works'.

Taxation Ruling TR 97/25 deals with the operation of Division 43 of the ITAA 1997 and provides at paragraph 9 that construction expenditure includes preliminary expenses such as architect fees, engineering fees, foundation excavation expenses and costs of building permits. These expenses are accepted as being 'in respect of' the construction of capital works.

Subsection 43-70(2) of the ITAA 1997 excludes certain expenditure from 'construction expenditure'. Expenditure on landscaping is so excluded (paragraph 43-70(2)(d) of the ITAA 1997).

For expenditure to be incurred 'on' landscaping, there must be a sufficient connection and close association between the expenditure and the actual landscaping work. It is not limited to expenditure incurred directly on the actual landscaping, but does not extend to expenditure more remote in purpose (Robe River Mining Co Pty Ltd v. Commissioner of Taxation (1989) 21 FCR 1; 89 ATC 4606; (1989) 20 ATR 768; Pine Creek Goldfields Ltd v. FC of T 99 ATC 4382; (1999) 41 ATR 471; QCT Resources Limited v. FC of T 97 ATC 4432; (1997) 36 ATR 184; Taxation Ruling TR 2002/1).

The landscaping design was prepared specifically for the taxpayer's landscaping work, and the taxpayer carried out the landscaping according to the design. The landscaping design was an integral part of the taxpayer's landscaping works. There is a sufficient connection between the expenditure incurred on the landscaping design and the actual landscaping work. Therefore, the expenditure incurred on the landscaping design is part of the expenditure 'on' landscaping. It follows that the expenditure incurred on the landscaping design is not 'construction expenditure' as defined in section 43-70 of the ITAA 1997.

Year of income:  Year ended 30 June 2006

Legislative References:
Income Tax Assessment Act 1997
   Division 43
   section 43-70
   subsection 43-70(1)
   subsection 43-70(2)
   paragraph 43-70(2)(d)

Case References:
Robe River Mining Co Pty Ltd v. Commissioner of Taxation
   (1989) 21 FCR 1
   89 ATC 4606
   (1989) 20 ATR 768

Related Public Rulings (including Determinations)
Taxation Ruling TR 97/25

Related ATO Interpretative Decisions
ATO ID 2002/1098

Keywords
Capital expenditure
Construction costs
Landscaping expenses

Siebel/TDMS Reference Number:  5229144

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  1 September 2006

ISSN: 1445-2782